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4 Reasons to Buy Stocks in 2013 - views
BALTIMORE (Stockpickr) -- If you’re not buying stocks right now, you’re making a big mistake.
To a lot of investors, that sentence sounds crazy right now -- especially after the S&P 500 has already managed to rally close to 14% in the last year, and the big index posted its best January since 1997. Is there still any more room for stocks to move up in 2013?
The short answer is a resounding “yes,” and I’ve got four reasons why.
Back in October, I wrote a “slightly bullish” article called “Dow 55,000? It's Closer Than You Think. Now, mind you, October wasn’t that long ago, but sentiment was very different from what it is now. Investors absolutely hated stocks. Most of the comments on equities were about why the next 2008 was right around the corner.
Now, though, while most investors still hate stocks, they hate them because “everyone else” loves them and because this rally is unsustainable. Which is it?
Make no mistake: Equities can certainly move higher when sentiment is squarely against them, especially in prolonged low-volume conditions like we’re in right now. That’s not a contrarian signal, however. It’s a signal that a new trend is in force.
So why should you buy stocks in 2013? Here’s the executive summary.
1. You Don’t Have Any Other Choice
The biggest reason to buy stocks is the one that’s hidden in plain sight: You don’t have any other choice right now.
Following 2008, investor anxiety has been ramped up. It’s kept investors out of the market long enough to miss out on approximately $200 billion in stock gains according to Bloomberg, and it’s getting old. No matter what investors may think about stocks, in a society in which retirement plans are wholly dependent on the capital markets, enough people are realizing that stocks are still the only option.
Why? Because you can’t fight the Fed.
Ben Bernanke may talk about using Fed tools to encourage investors to buy stocks, but what he doesn’t say is that he’s doing it by turning the screws to investors with money in (almost) every other asset class. With interest rates pressed as near to zero as possible and inflation far from zero, we’re in a toxic environment for the risk-free assets that investors have been flocking to for the past five years.
The question now is just how much principal investors are willing to lose in treasuries (or see flat-lining in most other fixed income investments) before they can stand staying away from stocks.
2. International Markets Are on Fire
Meanwhile, international markets are red hot.
Overseas stocks saw the hardest fall post 2008 as the higher beta in emerging market economies suddenly started looking like less of an advantage and more of a liability. But in the last few months, they’ve been rallying hard. Despite the economic crisis in Europe, equity markets in the EU have been hammering home new highs, Japan is coming off of a generational bottom, and the developing world has been doing one better.
Emerging market stocks have been showing extreme relative strength versus the S&P 500, with indexes like Hong Kong’s Hang Seng, the Shanghai Stock Exchange Composite, and Mexico’s Bolsa all looking bullish.
Why are international rallies good for U.S. markets? First, beefier valuations aboard for stocks help make U.S. stocks look cheaper, drawing more international cash into the market. And second, in this connected world, how many S&P or Dow components do you know of that don’t do business overseas? Market rallies overseas increase the balance sheet values for U.S.-listed firms too.
3. Market Technicals Are Bullish
You don’t have to be a whiz technical analyst to see what’s been going on in the S&P 500 since 2008’s market crash:
Stocks are in an uptrend, simple as that.
And despite all of the “overbought” talk that’s been circling around stocks for the last couple of weeks, the momentum gauge that’s spotted every other correction along the way doesn’t agree (that gauge, incidentally is nine-week RSI). If we’re not even overbought enough for a healthy correction, why would stocks be overbought enough for a crash?
I’ve said before that the last decade in stocks mirrors the price action that we saw in the 1970s -- and in the 1930s before that. Each of those periods came with major stock crashes that convinced investors Wall Street couldn’t be trusted -- and those last two were followed up by long-term sustained rallies for stocks.
As I write, we’re around 5% shy of the all-time highs that the S&P 500 set back in 2007. That means that investors aren’t clawing at getting back to even with their portfolios. In the history of investing, stocks have only spent a total of around two and a half months higher than where they are now. That has some big psychological implications for anyone who’s allocated in equities right now.
And that’s not abnormal or unsustainable either. Just take a look at a long-term equity chart. Most investors have spent their entire lives with stocks at or near all-time highs.
Structurally, we’re in a good place for money flows from risk-obsessed assets like treasuries to get dumped into stocks. It’s already been happening measurably in the last couple of months. There’s a whole lot of that dry powder sitting on the sidelines that could fuel stocks in 2013.
4. The Fundamentals Are Bullish, Too
Fundamentals are the final piece of the puzzle for stocks in 2012. And they too look bullish right now.
I read an op-ed the other day that led with a real head-scratcher. I’ll paraphrase: “With the rally in stocks we’ve seen in 2013, you’d think corporate profits were surging, the economy was growing, and everyone who wanted a job had one. That’s obviously not the case.”
It took me a second to compute whether I was reading sarcasm -- because that most certainly is the case.
Corporate profits have hit record highs yet again, beating analysts’ best guesses this quarter in two of every three earnings calls. Those profits have fueled record cash holdings too. Personal incomes and consumer spending are both up markedly in the last quarter. And while the jobs market may not be on fire, jobless claims have been falling like a rock in recent years (they’re now at pre-2008 levels). If those are the stats that’ll dictate a rally from a fundamental side, things could be worse. Much, much worse.
The bottom line is this: We’re in an environment where we could soon have “dartboard market” for stocks. In other words, investors will be able to make money in stocks by throwing a dart at a board covered in ticker symbols. As the old adage goes, everyone’s a genius in a bull market.
If that sounds nuts, take a closer look at performance this year. Only two Dow components are down in 2013 -- and even then just barely.
Get your dartboard ready.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.